ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes, Chair
TenyAgrlss
Julie Belaga
John Boland
George Butcher
Donald Cotrell
Michael Curiey
Rachel Dealing
Pete Dontenld
Kelly Downard
MatyFrancoeur
Vincent Girardy
Steve Grossman
Jennifer Hernandez
Keith Hinds
Steve Mahfood
Langdon Marsh
Greg Mason
Cherie Rice
Helen Sahi
Andrew Sawyers
Jon Smith
QregSwartz
Sonla Toledo
Jim Tozzi
Billy Tomer
Justin IVUson
APR 17 2007
Honorable Stephen L. Johnson
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Administrator Johnson:
There is a long history of concern over the large shortfalls in infrastructure
investment in the drinking water and clean water sectors. A 2002 EPA report
estimated capital needs of $602 billion over a twenty-year period ending in 2019.'
While this amount may be modest by comparison to the overall U.S. capital
market, it has proven beyond the means of many local government providers of
water services. The same EPA report found that current rates of capital spending
in these sectors would fall short of infrastructure needs by some $224 billion over
the twenty-year period.
The 1986 Tax Reform Act created a new category of bond-the private
activity bond (PAB) — which would be eligible, under certain conditions, for tax
exempt status. The PAB category replaced an earlier provision for similar bonds,
usually known as industrial development bonds (IDBs). The Act also set a
substantially more restrictive limit, or cap, on the total volume of PABs which can
be issued in a given State each year.
In its first-ever Advisory Statement to the Administrator2, this Board
argued that the unified State volume caps were constraining tax-exempt financing
in a way that was limiting the supply and/or increasing the cost of investment
funds for environmental facilities. Accordingly, the Board recommended that
bonds for environmental purposes be either (1) reclassified as government bonds
or (2) specifically exempted from the State volume caps.
This recommendation was repeated several times in various forms during
the following 16 years. In 1999, the Board advocated reclassifying all public-
purpose bonds for water and wastewater projects as tax-exempt government
John Wise
Stan Melbwff
Designated
Federal Official
\ U.S. Environmental Protection Agency, "The Clean Water and Drinking Water
Infrastructure Gap Analysis," Washington, D.C., September 2002.
2 Environmental Financial Advisory Board, "Incentives for Environmental Investment:
Changing Behavior and Building Capital," U.S. Environmental Protection Agency,
Washington, D.C., August 9,1991.
3 Ibid., pp. 15-16.
Providing Advice on "How To Pay" for Environmental Protection
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bonds.4 That same report also recommended a State volume cap exemption for
watershed restoration bonds. In 2001, while addressing the need for increased
participation by the private sector in providing environmental services, the Board
identified the State volume cap on PABs as one of three major barriers.5 At that
time, the Board stated that:
"EPA should support the exemption of private activity bonds from state volume caps,
whose proceeds finance public-purpose drinking water and wastewater facilities."6
It has now come to the attention of the Board that the President's budget for Fiscal Year
2008 includes a proposal that is virtually identical to the Board's 2001 recommendation. If
adopted, the effect would be to exempt, from the unified State volume cap, qualified private
activity bonds (PABs) used to finance the "furnishing of water" and/or "sewage facilities,"
The Board continues to support the work of the Clean Water and Drinking Water State
Revolving Funds, believing that they have already made, and will continue to make, a large
contribution to closing the investment gap. However, much more needs to be done.
After reviewing the President's proposal, the Board concludes that its adoption will be
another important step in the effort to finance needed water supply and wastewater infrastructure.
We believe that the proposed exemption will increase the supply of capital for these purposes as
well as lower the cost of capital to many of those communities already making use of private
investment.
The Board expresses its Ml support for this proposed change in the tax law and is prepared
to assist EPA in any way in its efforts to achieve this.
Sincerely,
&f , "J <&|»Ng-3 ( ~*—' '
A. James Barnes ^f/&^0y A, Stanleyvleiburg
Chair ' ' Designated Federal Official
cc: Benjamin Grumbles
Assistant Administrator for Water
4 Environmental Financial Advisory Board, "Recommendations and Final Report on Financing Opportunities
for the Clean Water Action Plan," U.S. Environmental Protection Agency, Washington, D.C., July 1999, p.
12.
5 Environmental Financial Advisory Board, "Private Sector Initiatives to Improve Efficiencies in Providing
Public-Purpose Environmental Services," U.S. Environmental Protection Agency, Washington, D.C., June
2001, pp. 6-8.
6 Ibid., p. 9.
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